The Receivables Purchase Agreement
A merchant cash advance arrives dressed as a sale. The funder purchases a portion of the revenue a business has not yet earned, pays a discounted price for it today, and collects a fixed share of receipts until the purchased sum has come back in full. No interest rate appears anywhere in the document, and no lending statute, in the funder's telling, has any business applying to a transaction in which nothing was lent. The drafting avoids the grammar of credit with the care of people who know which words attract a regulator and which do not.
A restaurant owner who needs forty thousand dollars will not be handed a loan document. She will be handed a Receivables Purchase Agreement, and inside it she will find a purchased amount, a purchase price, and a specified percentage, each defined at length. The word interest appears nowhere in the pages. The funder wires the purchase price, and the business begins remitting payments by ACH, drawn from its operating account daily or weekly, until the purchased amount has been collected. The purchased amount always exceeds the advance. The spread between the two figures is the funder's compensation, written not as a rate of interest but as a factor rate.
The agreement speaks of a purchase, the bank ledger shows a withdrawal arriving every morning, and the owner tends to reach for plainer words than either.
Most of the agreements that cross this desk carry factor rates between 1.2 and 1.5. A business that receives one hundred thousand dollars will therefore return between one hundred twenty thousand and one hundred fifty thousand. The repayment window, which the contract declines to call a term because terms belong to loans, runs in the usual case from four months to eighteen. The withdrawals themselves, anywhere from several hundred dollars to several thousand, commence within days of the funding.
The mechanics look simple, and the simplicity conceals the price. A factor rate of 1.4 repaid across six months resembles a 40 percent annual rate and is nothing of the sort; the arithmetic, computed against the declining balance, puts the true figure nearer 80 percent, and in some structures past 100. The reason is timing. Each debit reduces what remains outstanding, yet the purchased amount never adjusts. Whatever the speed of the repayment, the business pays the entire premium.
The industry's answer, offered wherever a judge will hear it, is that the funder carries the risk. If the business earns nothing, nothing is owed, and if the business closes, the funder absorbs the loss. The contractual proof on offer is the reconciliation clause, under which a merchant whose revenue declines may request an adjustment of the daily remittance. The clause binds. It also, in practice, achieves close to nothing. Some funders honor it as written, though the list runs shorter than the industry suggests.
The courts have begun to read these contracts with colder eyes. The test applied in New York asks three things of an agreement: whether the reconciliation provision is genuine rather than decorative, whether the contract fixes a definite repayment term, and whether the funder keeps recourse should the merchant enter bankruptcy. In LG Funding, LLC v. United Senior Properties of Olathe, the Second Department stated the principle in plain terms: a transaction becomes a loan only where the funder is absolutely entitled to repayment under all circumstances. A funder who bears a real risk of loss has purchased something. A funder whose risk is ornamental has made a loan and given it another name.
But for the label, the usury statutes would reach most of these contracts. Loans answer to interest ceilings, and a New York loan priced above the statutory limit is void as a matter of law, not merely voidable; a purchase of receivables answers to no ceiling at all, which means the same arithmetic, the same daily debits, the same premium a usurious lender could never have collected, passes through enforcement without comment so long as the paper calls itself a sale. How far that logic travels outside New York varies with the state, and I would not promise uniformity.
The architecture of the industry rests on that characterization rather than on its economics. The lived experience of an MCA resembles high-cost credit in nearly every respect an owner can feel, and the exemption from the rules written for high-cost credit hangs on the word purchase. Most owners learn the difference after the signature, not before. I understand why; the documents were drafted so that they would.
